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Moment risk premia and the cross-section of stock returns in the European stock market

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  • Elyasiani, Elyas
  • Gambarelli, Luca
  • Muzzioli, Silvia

Abstract

This article investigates whether volatility, skewness, and kurtosis risks are priced in the European stock market and assess the signs and the magnitudes of the corresponding risk premia. To this end, we adopt two approaches: a model-free approach based on swap contracts, and a model-based approach built on portfolio-sorting techniques. A number of results are obtained. First, stocks with high exposure to innovations in implied market volatility (skewness) exhibit low (high) returns on average. Second, the estimated premium for bearing market volatility (skewness) risk is negative (positive), robust to the two approaches employed, and statistically and economically significant. Third, in contrast with studies on the US stock market, we identify the existence of a size premium in the European stock market: small capitalization stocks earn higher returns than high capitalization stocks.

Suggested Citation

  • Elyasiani, Elyas & Gambarelli, Luca & Muzzioli, Silvia, 2020. "Moment risk premia and the cross-section of stock returns in the European stock market," Journal of Banking & Finance, Elsevier, vol. 111(C).
    • Handle: RePEc:eee:jbfina:v:111:y:2020:i:c:s037842661930305x
    DOI: 10.1016/j.jbankfin.2019.105732
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    Cited by:

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    5. Ahmed, Walid M.A. & Al Mafrachi, Mustafa, 2021. "Do higher-order realized moments matter for cryptocurrency returns?," International Review of Economics & Finance, Elsevier, vol. 72(C), pages 483-499.
    6. Cueto, José Manuel & Grané Chávez, Aurea & Cascos Fernández, Ignacio, 2021. "How to explain the cross-section of equity returns through Common Principal Components," DES - Working Papers. Statistics and Econometrics. WS 32258, Universidad Carlos III de Madrid. Departamento de Estadística.
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    More about this item

    Keywords

    Volatility risk; Skewness risk; Kurtosis risk; Cross-section; Risk-neutral moments; Risk premia;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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